Saturday, January 20, 2007

Climates for change

In case you hadn't noticed, Tom Vilsack, is officially running for President. The former Democratic governor of Iowa was in Boston yesterday to talk to a small group of invited guests at a downtown law firm organized by Gary Hirshberg. Environmental entrepreneur Hisrshberg is the founder and CEO of Stonyfield Farm and an unabashed supporter of Vilsack.

After delivering some brief remarks, Vilsack invited questions. He was asked if he could identify at least one issue that cut across partisan lines that he and other candidates could talk about as a way of helping unify the nation. Without hesitation he answered, "Yes, it's children". He went on to say (I'm paraphrasing here) that we all want a better world for our kids and most of us would be willing to do anything to achieve that goal. He then seamlessly (and very convincingly) wove that into a statement about why combating climate change is at the top of his list of priorities.

According to the STRATFOR report that follows, US and EU government leaders are struggling to find the most effective way of framing the issue of climate change in the face of mounting scientific evidence that the problem is real and getting more serious with each passing day. Their challenge it seems, is to motivate citizens to act in ways that are consistent with current national priorities.

U.S. President George W. Bush will outline his administration's newest energy policy during his State of the Union address Jan. 22. In last year's speech, he said the United States was "addicted" to foreign oil and, particularly for national security reasons, needed to wean itself from this addiction. This year, Bush is not likely to call for a mandatory carbon cap, but when the issue reaches Capitol Hill, carbon caps will be on the table. The crucial selling point to the public, both in the State of the Union and afterward, is that the energy plan that emerges will be characterized as a part of a larger mission to improve national security.

Meanwhile on Jan. 10, just days after Russian oil transiting Belarus came back online, the European Union released a much-anticipated energy plan. In support of the plan, EU Energy Commissioner Andris Piebalgs said the European Union will dramatically step up its efforts to reduce greenhouse gas emissions. A particular focus of this effort will involve investing in the bureaucratic and regulatory infrastructure required to maintain a sizeable greenhouse gas reduction regime capable of lasting decades.

The rhetoric would make much more sense if the United States and the European Union swapped points of view. The European Union does not need a robust climate change policy nearly as much as it needs to find a way to avoid being dominated by Russia, due to Europe's dependence on Russian oil and natural gas. Yet, the much-anticipated energy policy plan focuses from the beginning on climate change and carbon intensity.

For its part, the United States does not face an energy-driven existential crisis, though many inside and outside the administration argue that dependence on Middle Eastern oil restricts U.S. foreign policy options. Still, almost all major players in the country's economy have come to agree on the need for a more robust climate change policy, even if international pressure alone motivated some to adopt this position.

In both cases, the logic is that politicians have selected a strong, existing policy platform from which to sell their new, difficult policies. The Bush administration is viewed as being more focused on foreign policy and security than on domestic (and certainly environmental) issues, but Bush can sell a new energy policy if it has implications for national security. Europeans, meanwhile, are comfortable confronting energy in the context of pollution and climate change, and have become world leaders in the climate fight. But the European people are reluctant to view themselves as completely vulnerable to Russia's whims.

In truth, both the United States and the European Union have embarked on a new, shared course on energy -- one pointed toward diversification of energy sources, increased efficiency, a renewed interest in nuclear power and very large investments into new technologies. As Europe increasingly comes to view its energy position as nearing a crisis, investment in new technology will only increase, as will pressure from Europe on others for a more robust global climate change regime.

The European Perspective

A Eurobarometer poll taken directly before the three-day Russian oil shutoff found that energy placed 12th among Europeans' issue priorities, far below unemployment and crime. When the European public thinks about energy, its biggest concern is price, followed by environmental problems and supply. The public's nonchalant attitude toward the lifeblood of the economy has placed European leaders in a position where they must find a way to make hard decisions on energy issues -- raising prices -- while also remaining in office.

German Chancellor Angela Merkel might have the most difficult job in this respect. She is saddled not only with a very high level of dependence on Russian supplies, but also with a promise -- made during the formation of Germany's compromise government -- to continue with the previous Social Democratic Party government's commitment to slowly shut down the country's nuclear power industry through attrition. At the same time, Germany is under Russia's energy thumb, committed to a 20 percent reduction in carbon emissions and shutting down the air pollution-free third of its energy system.

The only bright spot for Merkel is that Germans actually seem to care about energy issues. In contrast to the rest of the European Union, Germans place energy supply at the top of their issue-priority list, followed closely by climate change, so a lively debate about both nuclear and Russian energy is possible. Such a discussion is unlikely in France, where energy issues do not register with voters and shutting down the nuclear industry is economically impossible.

As fate would have it, Merkel is the current EU president, so the crisis with Russia has taken place during the six-month presidency of a serious leader whose political base actually seems to grasp the gravity of Europe's situation. As a result, the European Union -- lotus-eaters and industrialists alike -- finds itself led by a group inclined to deal with Europe's predicament.

Europeans and Climate

In renaming the EU energy plan, Piebalgs signaled that he would use the climate change platform to bring about a revolution in Europe's energy system. It is not that selling sacrifice to avoid climate change is easier than selling sacrifice for national security -- both are difficult in Europe. Instead, the EU approach is to take advantage of tools originally put in place to reduce greenhouse gas emissions as a means to reduce European dependence on Russian oil and gas instead.

To understand why climate change will be helpful to Europe, it is important to understand the seriousness with which Europeans take the climate change issue.

The European view is quite different from the American view. The majority of Europeans are firmly convinced that greenhouse gasses from industrial activities are causing the Earth's climate to warm (never mind that transportation is the single-largest source of greenhouse gases). They take the issue seriously, demanding that their politicians act to fight global warming and decrying U.S. selfishness in not taking stronger steps.

To combat climate change, the EU has adopted a policy that requires union-wide reductions in greenhouse gas emissions, with some countries -- the United Kingdom, Germany and France -- cutting emissions by as much as 25 percent of 1990 levels by 2012. To make the changes necessary to reach these targets, the European Union has created a series of union-wide enforcement mechanisms, including emissions trading, and subsidized investment in new technologies while penalizing investment in older, more "carbon-intense" technologies.

The mechanisms the European Union has developed have had a patchy record of effectiveness. Some work well. Some work much better in theory than in practice. Others were doomed to fail from the start. While overall these mechanisms have not proved successful enough to allow Europe to meet its commitments under the Kyoto Protocol, Europe nonetheless has the advantage of having experience with such mechanisms.

Central to the new EU plan is to encourage a free market in energy distribution. Piebalgs argues this will encourage competition, which will keep prices lower and also allow consumers to pay the true price of electricity, rather than having prices kept low by taxpayer subsidies. With "real" pricing, Piebalgs foresees a rise in the cost of electricity, but considerable efficiency as well.

The next step in his plan is to strengthen the continent's carbon-trading system. In theory, the system places a surcharge on power from carbon-intense sources (e.g., coal, oil, gas) while rewarding the use of renewable power sources (e.g., solar and wind). This system is increasingly referred to as "placing a price on carbon." By artificially reducing the marginal difference between the price of carbon-intense energy (which remains relatively inexpensive) and alternatives, the system in theory encourages the adoption of new technologies.

Finally, the plan calls for the expansion of national renewable portfolio standards in each EU member state. This expansion would raise the amount of energy that must come from renewable sources from 15 percent to 20 percent in 2015. It also would make the renewable portfolio mandatory rather than voluntary.

Through this mandate, the EU plan demands that members dramatically increase the use of renewable energy, regardless of the success of emissions trading in encouraging the use of noncarbon-intense sources. In addition to the immediate effect of reducing demand for natural gas and coal, the long-term goal of this measure is to increase investment in and demand for alternative energy sources -- so economies of scale further lower the price of alternatives -- and to encourage investment in research and development.

The U.S. Platform

When Bush speaks about climate change in the State of the Union address, his remarks probably will be laced with rhetoric about vulnerabilities stemming from uncertain oil markets, price shocks and continued dependence on the Middle East. The president and his administration may or may not actually believe these are serious vulnerabilities, but the political pressure to do something about climate change is such that he will use national security to provide the context for his move. This is because national security is an effective platform from which to propose sacrifice.

Climate policy, meanwhile, has been only slowly entering into the American policymaking mainstream. Now, however, the state-by-state approach to climate change has begun to reach a critical mass, and this has brought increased pressure from business for the federal government to provide a sense of certainty about what is coming. As a result, climate change is emerging as a federal issue, both in Congress and in the executive branch. These pressures would have emerged even if the Democrats had not taken Congress, but with the change in power, some significant climate-focused policies are now inevitable.

Still, as a recent report by Securing America's Future Energy shows, dressing climate change policy in national security garb is the easiest political path to sell the sacrifices that an effective greenhouse gas reduction policy would require. While the shared sacrifice of improving the world's environment is noble, territorial integrity and reducing military conflict are much easier political sells. Americans still feel vulnerable, and the public is looking for ways to reduce the country's international ventures.

U.S. environmental activists know better than most Americans that the environmental argument is harder to make than the national security argument, and so in some instances they have begun to respond to the challenge by reframing energy reform -- not as climate change-mitigating efforts, but as efficiency-improving efforts that will pay off eventually in energy savings. It might have been the only view of sacrifice that could compete with the Bush administration's position: The former promises more money later; the latter promises security. Environmentalists hit on this plan too late, however, or perhaps did not plan on a Democratic congressional victory that would force energy reform into the legislative phase so quickly.

Efficiency, Diversification and Escaping Russia

Europe has a limited number of options in its staring contest with Russia. Certainly, construction of additional pipelines from North Africa to the continent has become more attractive, as have additional liquefied natural gas importation facilities and nuclear power. But even when taken together, these are unlikely to free the continent from Russia's energy grasp. The long-term answer is efficiency and diversification of energy sources -- and Russia is encouraging investment in this direction.

Regardless of how it is justified, the two largest economic blocs in the world, with combined annual gross domestic product of more than $23 trillion, have both decided to invest in new energy sources and conservation. The EU plan includes investment of more than 900 billion euros ($1.17 trillion) into energy technology over the next 15 years. Meanwhile, in the United States, investment in new energy systems is increasing dramatically (though likely not at the rate it will in Europe). Ethanol-oriented companies soared on the U.S. stock market in 2006, but the real investing during the coming years will be into more revolutionary technologies. A handful of large multinationals and venture capital firms are leading this wave.

It is impossible to predict technological breakthroughs, but the amount of money being invested in energy technology aimed at the generation, transfer and storage of energy, as well as improvements in the efficiency of appliances and vehicles, strongly suggests that technology will improve dramatically in the coming decade. The push for technological change from Europe will be the most intense -- for so long as it has not found an alternative system, the European Union will be under threat from Russia. Looking at Europe's predicament -- not to mention the 900 billion euros it plans to spend -- the United States, Japan, South Korea and other highly industrialized, technologically proficient countries will see the rewards available for major energy breakthroughs.

Europe cannot afford to care whether these new technologies are American, Korean or Chinese; it needs to find a way to escape from Russia's grasp. Based on its experience, one easy, predictable move for Europe is to continue to press for a significant, binding global climate change regime that would place the United States and other technology leaders in a similar (though significantly less dire) energy predicament, thereby dramatically increasing the interest of those governments in new, more efficient technologies.